In Kazakhstan the legal framework for the organization of activity of Islamic banks and Islamic finance has been established. Thus, on the 12thof February, 2009 the Law of Kazakhstan “On amendments and additions to some legislative acts of the Republic of Kazakhstan on the organization and activities of Islamic banks and Islamic finance” has been adopted.
The main block of changes concerning the introduction of Islamic finance instruments is related to the Law of the Republic of Kazakhstan “On Banks and Banking Activities in the Republic of Kazakhstan” and aimed at creation of a legal framework for the functioning of Islamic banks, the removal of restrictions preventing the introduction of Islamic banks, determination of the forms and methods of state regulation and supervision of Islamic banks, list and order of the Islamic banking operations.
Changes to the Law of the Republic of Kazakhstan “On securities market” allow the issuance and circulation of Islamic securities (sukuk).
Changes to the Law of the Republic of Kazakhstan “On investment funds” include the possibility of creating Islamic investment funds. At the same time the shares and units of Islamic investment funds are also considered by the Law on Securities Market as Islamic securities.
On 22nd of July, 2011 the Law of the Republic of Kazakhstan “On amendments and additions to some legislative acts of the Republic of Kazakhstan on the issues of Islamic finance” was adopted. According to the law the state was allowed to issue sovereign Islamic securities, as well as the list of corporate issuers of Islamic securities was expanded.
Thus, basic requirements for activity of Islamic banks and issuance of Islamic securities (prohibition of charging fees in the form of interest, funding contrary to the norms of Islam, mandatory presence of the Council on the principles of Islamic finance in Islamic banks and the creation of an Islamic special finance company under the issuance of Islamic securities) has been set.
There are no restrictions on the participation of Islamic banks in corporate equities, as well as restrictions prohibiting Islamic banks engage in any activity other than banking, in the financing of production and trading activities. Thus, Islamic banks are allowed to engage in trading activities and to share profits and losses with their customers.
Moreover, the following Islamic banking products adapted to the institutions of the civil legislation of Kazakhstan, have been identified:
- interest free demand deposits;
- fiduciary money management (investment deposit) (Mudarabah);
- bank lending operations without charging a fee (Qard al-Hasan);
- trade financing (Murabaha);
- financing of production and trading activities on a partnership basis (Musharaka);
- rent (leasing) (Ijara);
- agency services under the Islamic banking activities (wakala).
The conditions for the issuance and circulation of the following types of Islamic securities (sukuk) have been created:
- shares and units of Islamic investment funds;
- Islamic lease certificates (sukuk al-Ijara);
- Islamic participation certificates (sukuk al-musharakah);
- other securities recognized as Islamic securities under the laws of the Republic of Kazakhstan.
At the same time, all legal entities who are residents of Kazakhstan can be issuers of corporate Islamic securities.
In addition, issuance of sovereign Islamic securities has been allowed. In accordance with the Budget Code the issuer of the sovereign Islamic securities is a central government body authorized for the implementation of the budget, which determines the amounts, terms and conditions of each issue of the government securities.
With regard to Islamic banking products there is a separate tax regime providing for tax incentives equivalent to traditional financial transactions (financial transactions are exempt from value added tax).
In order to provide an opportunity to the public to invest in Islamic securities the fee for the processing of electronic orders on transactions with Islamic financial instruments in JSC “Central Securities Depository” has been cancelled.
Moreover, for the further development of Islamic finance in the official list of JSC “Kazakhstan Stock Exchange” a separate sector “Islamic securities” has been created.
The Law “On amendments and additions to some legislative acts of Kazakhstan on insurance and Islamic finance” has been adopted on 27th of April 2015. The Law includes issues of Islamic insurance, amendments providing for recognition of commodity Murabaha as Islamic banking operation, mechanisms and methodologies for tax administration of this operation, as well as acceptance of deposits by Islamic banks on the principles of agency activities (wakala) and Islamic leasing.
On 24th of November 2015 the Law providing structure of government Islamic securities issuance and conversion conventional bank into Islamic has been adopted. The purpose of the adoption of the Law is to ensure the further development of Islamic finance in Kazakhstan by improving the existing structure of issuance of state sukuk and the creation of conditions for the conversion of conventional banks into Islamic banks.
The legal framework for accounting of the operations of Islamic finance includes additions to the chart of accounts (special balance sheet accounts for Islamic finance operations), instructions for accounting and preparation of financial statements by Islamic banks and Islamic special finance companies. Legal basis for accounting in the Republic of Kazakhstan has been developed on the basis of standards of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) in the framework of general principles and foundations of IFRS.